The gathering storm: A global trade war 

Hasnat Abdul Hye | Published: July 11, 2018 21:17:56 | Updated: July 15, 2018 22:01:33


The distant rumbling is not distant any more, it has arrived sending shock waves around the world. To use another metaphor, the spectre of war appears now more corporeal, as clear and present danger. The drum beat is about a war, one in which no lethal weapons will be used, not even through remote control, but by raising wall against foreign imports using tariff as the weapon of choice. What has now taken place in the opening salvoes is tit-for-tat tariffs slapped on each other's exports by the major economic powers and erstwhile trading partners in the world. If this escalates further a full-blown trade war may erupt threatening global economic growth end up with devastating depression reprising the 1930's worldwide depression in slow motion.

What is at stake is the global economic order that has evolved, through occasional ups and downs, into its present or, to be more apt, pre-present state. It beggars belief that America, the country which led the way to global economic co-operation after the Second World War, should be the errant world leader to place a spanner into the wheel of the world economy now recovering from the financial crisis of 2007.

The sudden turn of events roiling the global economic order is because of the narrowly focused nationalist and isolationist policy of President Trump and his obliging acolytes aimed at putting flesh on the bare bones of 'America First', a nativist slogan used during the last presidential election to reach out to the populist constituency of extreme right in American body politic.

America has long been a nation famous for what Thorstein Veblen called 'conspicuous consumption', battening on planned obsolescence or creative destruction. The difference between the past and recent time is that for long the country has been spending more than its savings and to cover the gap is relying on international debt. This debilitating economic malaise has been exacerbated by the decline of productivity in the manufacturing sector and because of it, loss of competitive edge over foreign products. Except for high tech-industries and the financial sector of fluctuating health, American economy depends on imports increasingly in greater volume. As a result, its trade deficits with major trading partners have ballooned year to year. European Union (EU), Japan, China, Canada and Mexico have belt up surplus in their balance of payment accounts of varying volume with America over the years. Financial commitments to cold war-era alliances like North Atlantic Treaty Organisation (NATO) and bilateral defence arrangements with a number of countries have only worsened America's external deficits. For the failure of successive Administration to make smooth transition from sunset industries to new age ones using cutting edge technology to be at par, if not superior, with trading partners America can only blame itself. Even the growing social inequality between the rich and the middle class and the poor is because of the failure to redistribute the benefits of globalisation through progressive taxation and targeted welfare programmes. But for all its economic ills, from unemployment, under employment with low wage to income inequality, America has found scapegoats in the 'other' in the form of migrant workers and more importantly wide-ranging imports. Ordinary Americans below the middle of the economic ladder sliding downward have nursed for quite sometime almost a primordial anger against 'enemies at the gate', the so-called predatory outsiders. Donald Trump is the first American President who gave voice to their simmering anger and frustration adopting 'America First' as the mantra for their salvation from misery. He became the new messiah and confounding all prediction trumped (what an irony!) the formidable candidate vying for the White House.

Many thought Trump's 'America first' was just a slogan to reach out to the populist vote bank. But straining belief of many saner elements in America and trusted allies abroad he has announced America's decisions, one after another, to withdraw from multilateral agreements that the country had initiated as leader of the post-war western world and later of the short-lived uni-polar world in the post-cold war world. The latest and worst of this retreat into unilateralism is the slapping of high tariffs on imports from Europe, China, Canada, Mexico and other countries in recent months. On June 01 America slapped 25 per cent tariff on imports of steel and aluminum from Europe, Canada and Mexico. These countries immediately retaliated with equivalent tariffs on American exports. Irked by this Trump Administration has threatened to impose tariff of 20 per cent on automobiles imported from EU. 'The EU is as bad as China, only smaller', Trump has been on record saying this with contempt removing any possibility of forging a common platform to fend of alleged unfair trade policy pursued by China. In a letter to American Administration the EU has warned of dire consequences for US economy if Trump follows through with his threat against auto imports from Europe. The European Commission said in its letter, 'up to $294 billion of US exports could be subject to counter-measures equivalent to a staggering 19 per cent of total US exports in 2017'. This tactic is similar to the EU's retaliation for US tariffs slapped on metals (steel and aluminum) that were announced in June came after Trump Administration.

The next salvo fired by Trump Administration was bigger and came on Friday, July 06 in the form of tariff amounting to 25 per cent on $34 billion in Chinese machinery, electronics, and high-tech equipment including parts for auto, computer hard drives and LED TVs. China lost no time and took retaliatory measures immediately by way of tit-for-tat tariffs on an equal number of goods with the same total value. Friday's announcement of tariffs and counter-tariffs could just be the opening skirmishes in an escalating battle between the two economic power houses that may erupt into a full-blown trade war with spill-over effects on world economy. Incensed by Chinese retaliation Trump has vowed as much as $450 billion in Chinese goods. With only $130 billion in Chinese imports to retaliate against, China has said that it will take quantitative and qualitative measures against US, hinting at punitive actions against American multinationals operating in China. Despite dire warnings about the impact of counter-tariffs on US exports, Trump believes that the robust American economy can outlast the retaliatory measures of China and other trading partners, including EU. China also believes with a greater focus on domestic demand and a reduced dependence on exports it can ride out the storm unleashed by Trump. A spokesperson of China's central bank said on Friday that the first punches given by America will have limited impact. 'The $35 billion trade war will slow down China's GDP (gross domestic product) growth by 0.2 percentage points only', said the spokesperson. Chinese stocks actually rose after the $35 billion tariff was announced because it was already priced into the market on the basis of previous threats by President Trump.

Apart from counter tariffs China has launched diplomatic initiatives to counter American trade offensive. In a recent summit held with 16 Central and East European countries China has proposed investment in infrastructure sectors giving rise to apprehension that the move is designed to divide the EU. Following up this summit China is hosting a meeting with an EU delegation headed by the European Commission President to chalk out a common strategy against American protectionist trade policy. Germany has already given permission to a Chinese company to set up a battery factory for electric-run cars. Preparing for the worst, China has already begun restructuring its trading regime. In the near future a new international economic order is likely to emerge on the basis of EU-China co-operation in foreign trade and investment. Whatever form this co-operation may take, it can only be expected to work against American economic interests.   

Experts have no doubt that a global trade war will unhinge world economy, slowing down its growth and changing its present trajectory. The Bank of England's governor has said after the tariff and counter-tariff measures that 10 percentage points rise in tariff between US and its trading partners could erase 2.5 per cent off US output and 1.0 per cent off global economic output. He warned that disrupted supply change and rising import cost will pave the way for a world-wide recession. As regards emerging and developing countries the tariff war may not affect immediately but a shrinking world economy will reduce trade with adverse consequences for these group of countries in the medium to long term.

Trump's tariff measures are ostensible to protect American interests and to make 'America first' a reality. In fact, it is much narrower than that. As Joseph Stieglitz wrote long ago, 'the US unfair trade laws are not written on the basis of economic principles. They exist solely to protect American industries adversely affected by imports (Globalisation and its discontents). Jeffrey Sachs is less charitable than Stieglitz and has called Trump a sadist suffering from paranoia and called for his impeachment. If the future of world economy looks bleak as long as Trump is in power so is Trump's future. That is the only silver lining in the gathering clouds.                                                              

hasnat.hye5@gmail.com

 

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